Q1 2022 VF Corp Earnings Call
[music].
Hello, and welcome to the VF Corp, first quarter fiscal 'twenty 'twenty 2 conference call and webcast. At this time all participants are in a listen only mode. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation.
As a reminder, this conference is being reported its now my pleasure to turn the call over to John Kelly Senior director of corporate development and Investor Relations. Mr. Kelly. Please go ahead.
Good morning Walt.
I'm Gonna VF Corporation's first quarter fiscal 'twenty 'twenty 2 conference call.
Participants on today's call will make forward looking.
Yeah.
These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially.
These uncertainties are detailed in documents filed regularly with the SEC.
Unless otherwise noted amounts referred to on today's call will be on an adjusted constant dollar basis.
State find in the press release that was issued this morning.
We use adjusted constant dollar amounts as lead numbers in our discussion because we believe they more accurately represent the true operational performance and underlying results of our business.
You May also hear us refer to reported amounts which are in accordance with U S. GAAP.
Reconcile.
Reconciliations of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors.
Due to the significant impact on the coronavirus pandemic on our prior year figures.
Today's call will also contain certain comparisons to the same period in fiscal 2020 for additional context.
These comparisons are on a reported dollar basis.
On June 28th 2021 the company completed the sale of its occupational workwear business.
Accordingly, the company has reported the related held for sale assets.
And liabilities up this business as assets and liabilities of discontinued operations and.
And included the operating results and cash flows of this business and disc ops for all periods through the data sales.
Unless otherwise noted results presented on today's call are based on continuing operations.
Joining me on the call will be VF, chairman, President and CEO, Steve rental and EVP and CFO, Matt bucket.
Following our prepared remarks, we'll open the line for your questions.
Steve.
Thank you John and good morning, everyone welcome to our first quarter call.
We are encouraged by the strong start to our fiscal <unk>.
2022 year, our teams delivered an outstanding first quarter powering VF back to pre pandemic revenue levels, while driving an earnings recovery well ahead of our initial expectations. We continue to see broad based momentum across the portfolio, which furthers my confidence in our ability to accelerate growth through fiscal 2000.
2 and beyond.
The near term environment remains somewhat clouded by virus surges in South East Asia uncertainties in other regions brought on by the impact of new variance and further pressures on the global supply chain. Our teams are executing we remain focused on the things that we can control and winning in the parts of our business for the consumers.
20 coming back strong.
And we remain confident in our ability to continue driving this sharp recovery across our business.
Matt will walk you through our results in detail, but I'll start us off with some Q1 highlights.
<unk> revenue has surpassed pre pandemic levels growing 96% or 83% organically to 2.
<unk> 2 billion with momentum across brands regions and channels.
Our global DTC business delivered high single digit growth relative to prior peak levels, driven by a strong acceleration from a brick and mortar stores in the U S and continued strength in our digital.
Our organic DTC digital businesses now.
Now, 72% above fiscal 2020 levels, including the growing benefit of our omni channel capabilities as we serve our consumers seamlessly across their choice of channel.
We've seen a sharp recovery in our wholesale business, which grew over 100% organically in Q1 approaching prior peak fiscal 2020 levels.
Strong sell through trends and clean channel inventory levels from the past year are now translating into stronger fall 'twenty..1 in spring 'twenty 2 order books supporting an improving outlook for our wholesale business for this year and beyond.
We've seen a strong recovery on our gross margin, which grew 260 basis points to 56, 7% in.
1 this represents organic gross margin expansion relative to prior peak fiscal 2020 levels. Despite a 30 basis point headwind from a more challenging logistics and freight environment VF.
VF drove organic earnings growth of 133% delivering 27 in Q1 essentially.
We are doubling our plan.
We're pleased to see our top line momentum and strong gross margin expansion translate into better than anticipated SG&A leverage and earnings flow through an indication of the upside potential of our model is our recovery accelerates now.
Now turning to our brand highlights from the quarter.
The vans brand.
In Q earned to pre pandemic revenue levels growing 102% in Q1 there.
The recovery has been led by global DTC business, which drove double digit growth relative to fiscal 2020 led by 73% growth in digital.
This DTC strength has been broad based with each region recording positive DTC growth.
Relative to pre pandemic levels.
More vans consumers have returned to in person shopping experiences earlier than expected and we see encouraging trends in our D to C kpis with consumers buying more frequently and spending more per purchase relative to historic levels.
In EMEA despite the.
A continued impact of Lockdowns and supply chain disruptions.
Vans business grew 125% this quarter, representing 30% growth relative to fiscal 2020 with strength across all major markets and stores reopened throughout the region.
Vans APAC business grew 19% in Q1 led by 22%.
Growth in China.
June marked a milestone for the brand in China with the soft launch of the vans family program while.
While the official launch will be celebrated with the Super brand day on Tmall Tomorrow, we have already registered over 1 million new loyalty members. Following the initial launch, bringing global vans family membership to nearly 17 million.
Consumers.
Vans kicked off its 52 week drop calendar this quarter seeking to create a consistent predictable globally aligned and focused approach to drive brand energy and consumer engagement 7 weeks into the program. We are encouraged by the initial consumer Reeves and the instant sellout of several early drops internally the.
The vans team has increased its focus energy and resources around driving newness and compelling storytelling, which we believe will unlock further long term value for the brand. The team is on track to more formally market. The vans drop list in fiscal Q3 ahead of the fall holiday season, we.
We remain bullish on the setup for vans moving through.
Fiscal 2022 and are encouraged by the early reads from the back to school season underway.
We are raising our full year outlook to growth of 28% to 29% representing growth of 9% to 10% relative to fiscal 2020.
Moving on to the North face global brand revenues increased 83%.
Representing 6% growth of our pre pandemic levels all regions rebounded sharply in Q1 highlighted by continued exceptional performance in EMEA, which grew 142% versus the prior year year, and 58% relative to fiscal 'twenty. Despite the impact of door closures over the period.
APAC business grew 22% in Q1 highlighted by 80% growth in digital relative to fiscal 2020 levels.
The north faces spring sell through rates for some of the highest in years, reflecting strong progress on the brand's ability to drive 365 day relevancy TNF.
TNF continues to drive energy and on mountain categories.
<unk> with the future like franchise as well as the new vector footwear rollout further establishing its legitimacy and outdoor footwear.
We also see outsized growth from the casual categories, such as logo wear which grew over 100% in Q1 as consumers show strong engagement with the brand off mountain.
TNF loyalty program.
<unk> has grown to over 7 million consumers, adding nearly 300000, new members in Q1, driven by exclusive member experiences enriching the consumer journey.
We continue to be encouraged by the broad based global momentum at the North face and now expect the brand to deliver 26% to 27% growth this year representing <unk>.
The expense of 17% growth relative to fiscal 2020.
Alongside this significant topline recovery, we're seeing strong improvements in profitability and continue to expect mid teen profitability for the team for TNF in fiscal 2022.
The timberland brand delivered a 63% growth in Q1 tracking.
15 of plan, we are encouraged by high teens growth in the Americas, and 87% growth in digital relative to fiscal 2020 levels.
We continue to see outsized growth from outdoor apparel and timberland pro each growing over 75% in the quarter.
Momentum behind core iconic.
<unk> ahead of continues with heritage styles being strong demand. Despite historically low inventories are.
Our timberland team remains committed to its purpose led vision highlighted by the recently announced global product take back program in partnership with recycled.
Beginning this fall U S consumers will be able to return any timberland product to a brand store.
Store to either be refurbished for resale or recycled into future products.
This program supports the brand's bold vision announced last fall for products to have a net positive impact on nature by 2030.
We are encouraged by timberlands strong start to the year and as a result, we now expect the brand to deliver modest growth relative to.
Fiscal 2020 surpass.
Surpassing pre pandemic revenues beginning in Q2.
Vicki has delivered another exceptional quarter growing 58% in Q1, well ahead of our plan as the brand has kicked off several new campaigns and inventories become more available we've been pleasantly surprised by the intensity of sell through performance across all.
All wholesale partners in the U S. This acceleration continues to be driven by both work inspired lifestyle product, which reported strong growth across all 3 regions as well as core work items.
We're inspired lifestyle now represents about 40% of global brand revenue.
Importantly, the dickies brand has begun to deliver meaningful profitability.
It's driven by both gross margin expansion and SG&A efficiencies.
Q1 represented a strong start to our goal of returning to double digit profit margins in the work segment in fiscal 2022.
Following a strong Q1 performance and accelerating demand signals across channels, we are confident raising our full year outlook for the dickies brand to mid.
Mid teen growth in fiscal 2022, representing over 25% growth relative to fiscal 2020 levels.
A quick update on Supreme we continue to be happy with the integration process.
Our supply chain organization continues to advance engagement with the Supreme teams with particular leverage opportunities and logistics capabilities.
And prevail and relationships, which couldnt comment on more opportune time.
1 quarter into our fiscal year, we remain confident in our outlook of $600 million and 25 from the brand.
Before I turn the call over to Matt.
I want to thank our associates from around the world across our brands and enterprise functions with a particular callout.
Supply chain teams, who have been working tirelessly over the past 18 months to minimize disruption against the backdrop of unprecedented volatility.
Our strong results are a reflection of the consistent execution hard work and inspiring dedication of our teams around the world.
This continued passion and energy alongside the broad.
Rod based nature of VF acceleration give me great confidence in our ability to continue driving the strong recovery underway.
While the first quarter represents a small portion of our total year, we're starting off fiscal 2020 to building up the great momentum, which began in February of this year.
And now I will turn it over to Matt.
Thanks.
Good morning, everyone I'm really happy to update you on our strong Q1 results and revised outlook for the year.
We are encouraged by the continued broad based momentum across our business on the set up for each of our big brands heading into the heart of our fiscal year.
Despite additional pressures throughout the global supply chain I remain.
Steve and our team's ability to execute and to build on the strong earnings recovery delivered in Q1.
Let me start with an overview of the operating environment across geographic regions.
In the Americas less than 5% of our stores were closed at the beginning of the quarter and all stores are currently operational.
A strong U S.
Hey, Conor easing U S restrictions and increase vaccination rates have encouraged a gradual recovery in foot traffic alongside continued strength in conversion.
Our Americas DTC business grew 84% organically in Q1, surpassing pre pandemic levels led by a sharper than expected recovery in our brick and mortar business.
Consumer appetite for athletic Athleisure, and outdoor categories remain strong benefiting our direct business as well as the performance of our key accounts.
Low inventories and strong sell through trends continue to drive down promotional activity and improved quality of sales across the marketplace.
Which is resulting in stronger than expected.
Good order books for the upcoming fall and spring season.
Moving on to the EMEA region.
While lockdown measures continued to affect economic activity. Our business has remained resilient growing 97% organically in Q1, representing 13% growth relative to fiscal 2020.
Both.
Both wholesale and DTC channels returned to growth relative to 2020 as continued strength from both our direct digital channel and from digital tightened partners up to more than offset the impact of brick and mortar store closures.
About 60% of our EMEA stores workflows to start the first quarter as we sit here today all of those doors have now reopened.
Consumer confidence is improving as restrictions ease and we've seen strong performance from our brick and mortar fleet following reopening.
For example, our UK business delivered triple digit growth from open doors. Following 3 months of Lockdowns representing growth of nearly 30% relative to fiscal 2020.
Finally, our <unk>.
Pac region continues to deliver double digit growth despite sporadic resurgence of the virus across many markets.
Our China business grew 12% in Q1, which was impacted by a wholesale timing shift of revenues from Q1 into Q2 <unk>.
Excluding this impact China would've delivered mid teen growth this quarter.
We continue to see digitally led.
Opened in the region, particularly with our tightened partners and remain confident in our ability to deliver greater than 20% growth in China in fiscal 2022.
While we remain pleased with our APAC performance to date, we are observing most southeast Asian market facing various degrees of Lockdowns and travel restriction restriction.
And while only about 5% of our stores are currently closed commercial activity has been impacted across most APAC markets outside of China and Hong Kong.
This latest rates also presents additional near term uncertainty for our global supply chain.
In recent weeks more widespread virus outbreaks in key sourcing country.
<unk> grew at lower levels of vaccinations have resulted in temporary factory lockdowns and manufacturing capacity constraints.
Our supply chain also continues to be impacted by port delays equipment availability and other logistics challenges.
Essentially every link in the supply chain has been impacted to varying degrees over the last 18.
18 months.
And while we're not immune to this we believe we've managed these challenges relatively better than most.
Our teams remain focused on delivering the products to satisfy increasing demand signals in the most cost effective and efficient way.
Some of the actions include using airfreight other means of expedited shipping and dual.
Listings where appropriate.
While we remain confident in our ability to service our strong growth plan. There is a financial implications of these actions.
For example, we expect to spend more than $35 million in incremental expedited freight charges relative to fiscal 2020.
We view our supply chain is a key competitive.
<unk> and our teams are proving this now more than ever.
I want to Echo Steve's depreciation for the supply chain team's incredible execution over the past 18 months.
As a result of their tireless and tremendous effort I remain confident in our ability to continue navigating this dynamic environment.
Now moving into our Q1 financials.
<unk>.
Total VF revenue increased 96% or 83% organically to $2.2 billion, reaching pre pandemic levels 1 quarter ahead of our initial expectations.
Our Q1 digital business is 72% above fiscal 2020 level organically, representing a 31% 2 year CAGR.
AGR. We also continue to see strength from key digital partners globally with pure play digital wholesale growth of over 70% relative to fiscal 2020.
The total digital digital penetration was roughly a quarter of our Q1 revenues, which represents about 2 ex our penetration from the first quarter of 2020.
<unk> gross margin expanded 260 basis points to 56, 7% representing organic expansion from Q1 peak gross margin levels in fiscal 2020.
Relative to last year. This strong expansion was driven by greater full price selling.
Largely offset by the expedited freight costs and business mix as our wholesale.
Oil business rebounded sharply in the quarter.
When compared to fiscal 2020 gross margin, we generated a strong mix benefit partially offset by the incremental air freight costs and FX.
Operating margin expanded meaning meaningfully to 6.8% driven by the strong gross margin.
Performance at SG&A leverage relative to the prior year we.
We delivered EPS of <unk> 27 in Q1, representing a 133% organic growth driven by a stronger top line and earnings flow through relative to our initial expectations.
Following the strong broad based performance in Q1, we are raising our full.
Year fiscal 2022 outlook, our outlook today assumes no significant changes to the environment, including increased disruption to our supply chain operations.
VF revenue is now expected to be at least 12 billion, representing at least 30% growth from fiscal 2021, and amid a mid teen increase relative to our prior peak.
Revenue in fiscal 2020.
Excluding the Supreme business, our fiscal 2022 outlook implies organic growth of at least 25% representing at least 9% organic growth relative to fiscal 2020.
As Steve covered the increase to our revenue guidance is broad based across the portfolio.
With stronger outlooks for each of our top 4 brands and sizable increases in 2 of our emerging brands Altra and Smartwater.
Specifically the improved outlooks are supported by stronger than anticipated order books, and the accelerating DTC trends, we've observed over the past 5 months.
Moving down the P&L, we still expect gross margin to.
To exceed 56.
56%, despite a 20% to 30 basis point headwind from additional air freight that wasn't assumed in our initial outlook.
We now expect operating margin to be at least 13% an improvement of over 20 basis points from our initial outlook a signal to the upside potential of our model as our top line accelerates.
<unk> fiscal 2022, EPS is now expected to be at least $3.20.
Including a 25 per share contribution from the Supreme brand, representing at least 20% earnings growth relative to fiscal 2020.
We continue to expect to generate over $1 billion of operating cash flow this year with planned capital expenditures.
<unk> of about $350 million, including the impact of growth investments as well as deferred capital spending from fiscal 2021.
As announced on June 28, we closed the sale of the occupational work business this quarter, providing roughly $615 million of additional liquidity.
These proceeds are reflected in our fiscal 2000.
What's your outlook for total liquidity to exceed $4 billion.
We expect to exit this year with net leverage between 2.5 times and 3 times, providing us meaningful near term optionality deploy excess capital moving forward.
So to conclude our prepared remarks I'm extremely pleased with the broad based strength, we're seeing across.
<unk> portfolio as we begin fiscal 2022.
We took bold decisive actions last year to position our brands and the enterprise for their strong recovery currently underway.
And the balanced broad based nature of this recovery along with the continued optionality that our model provides gives me confidence in our ability to drive.
<unk> long term growth moving forward.
I will now turn the call over to the operator and take your questions.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed on the question queue Press star 1 on your telephone keypad.
Confirmation tone will indicate your line is on the question queue you May press star 2.
I'll start with like true move your question from the queue for participants using speaker equipment. It may be necessary to take your phone off mute or pick up your handset before pressing star 1.1 moment. Please while we poll for questions.
Our first question today is coming from there on.
The southern SKU from Exane BNP Paribas. Your line is now live.
Good morning, Steve Good morning, Thanks for taking my question.
Wanted to ask about vans, it's nice to see the raised guidance for the brand.
It looks like vans was up single digits on a 2 year stack on this.
The toughest compare that you have for the quarter for the year, how should we think about the growth rates between the first and second half on.
The 2 year stack basis.
And are you raising the annual guide based on certain regional performance or is it wholesale and then.
Ill go into the minutiae here, but it looks like on DTC Americas was up but there was.
There might've been a timing shifts within wholesale Americas is.
On the case.
Yes.
You got a lot in that so I think we will make sure we try to get through it all and good morning, and great to talk to you yet.
So let me start with in terms of what we saw in Q1.
As you laid out there we really happy with the result.
Salt that we saw.
Certainly the sequential improvement in particular in our direct to consumer business.
It also in the Americas in particular from a DTC perspective.
So that was really encouraging there was some timing impact in the quarter.
From a wholesale shipping standpoint, though.
And by the.
Is that the thought that's all sort of caught up in terms of in terms of that in July that was about $30 million. So a few points of growth on a global basis.
<unk> the results in Q1 so.
As it relates to our outlook.
Basically what we're doing here is we're flowing through the Q1 beat.
From a DTC perspective.
Again that was primarily in the Americas.
We're partially extrapolating that into Q2 based on the trends that we've seen and by the way July is off to a good start.
And then we're dialing in some stronger wholesale order book that we're seeing.
Again, most most of that all in the Americas.
I would what I would say in.
So your point about first half second half I'd really just point you to the fact that our year to go outlook now implies about 12%, 13% growth versus versus fiscal 'twenty.
So hopefully that I think did I get everything you asked there in terms of the some of the details.
You too. Thank you. Thank you very.
<unk> for that on vans and Matt Steve.
Maybe a couple of questions on on the on how we think about the guidance, obviously youre, giving annual guidance, but.
You talked about $35 million impact from incremental freight 2030 bps on the GM can you talk about the shape of the gross margin.
Terms of the first half and second half and I think remind me, Matt, but I think during the Q&A.
Last call to Milan asked about how do we think about first half EPS I think it was about $1.20.
Due to the size of the impact of just the magnitude of the B, how do we think about first half EPS.
Yes.
So.
Let me first of all we're not going to give specific Q2 outlook today, but certainly as evidenced by our outlook, we're confident in taking the year up.
Remember I would I would remind you that the September October timeframe is always the hardest to call from a shipment timing perspective, I mean, there's.
There's a significant amount of activity during that period of time as we begin to really load up things on the wholesale side for fall and holiday and just given the supply chain pressures, it's really hard to call the puts and takes between quarters.
And to some degree I think we can expect that quarter to quarter volatility will continue in the near term.
However.
With what we know today, while some of the flow may not be perfectly optimized.
As we begin the season in particular, we don't expect a meaningful impact on our ability to ultimately deliver the fall holiday season.
And I'll remind you that as.
As we have continually done we expect that will perform.
However, the competitive set as it relates to gross margin.
What I would say is certainly we're holding the year.
At greater than 56, we've talked about the fact that we're absorbing some higher freight, particularly airfreight and other forms of expedited freight I think.
We said 20 to 30 basis points in their prepared remarks.
Better so versus our original outlook.
And a meaningful amount I will tell you that the vast majority of that actually sits in our second quarter is the way the way, we would expect that to play out.
The other thing I would remind you that we have currency headwinds.
We're up against debt will begin to abate a little bit as we move.
Marks a year.
And the other.
The last point I would make around gross margin, we talked about the fact that.
And our pricing actions, which have been relatively limited through spring 'twenty, 1 and fall 'twenty, 1 you'll see the impact of more significant pricing activity as we move into spring 'twenty 2.
So in the.
Later, and 4 window will benefit a little bit more from that perspective as well.
Very helpful. Thank you very much and best of luck.
Thanks, a lot and explorer.
Thank you. Your next question today can we felt <unk> <unk>. Your line is now live.
Okay.
Thank you good morning, everybody.
Just in looking at the detail you provided on that.
Trajectory of the business versus 'twenty it seems like.
You're now going to be trending over the long term EBIT margins that you provided at Beaver Creek, how do we think about those implications as to what the business can deliver.
In.
Q as environment full price sell through limited inventories.
And really accelerating demand.
On a global basis.
Yes, camilo good morning.
But I guess, what I would say to that is certainly we're really encouraged by first of all the.
The sharp recovery in gross.
Engine that we saw in Q1, which we've signal then we certainly anticipated, but certainly happy to see that play out.
As anticipated in the underlying margins in terms of the organic business actually above prior peak levels.
Our first quarter and so.
I think what you could what you could.
Marty I think.
Think about relative to the outlook range.
2 at least 13% operating margin given the air freight headwind that's at play and that we're calling out I think it really speaks to our confidence in seeing that SG&A leverage.
Average beginning to play out we said.
In our last call debt, if we saw some earnings.
Opportunity, which obviously, we're seeing that come to pass a bit in calling the Europe you would expect a strong earnings flow through as a result of that so I think again seeing that play out.
Despite the fact that we've got some headwinds.
On the supply chain side relative to freight that we didn't anticipate in may.
Got it and my second question is on <unk>.
Going back to the global.
On the global regions.
Are there regions rather.
You raised in your slides.
You raised the Americas, but you kept Europe and APAC.
The same as the prior prior guide.
Given what you're seeing in Europe in particular.
<unk>.
What did you talked about from a growth perspective.
Meeting demand in China, why would you not have raised them.
And the APAC regions.
Yeah. Good questions. So let me start with first of all APAC, China continues to be really strong, but you got to remember rest of Asia is pretty volatile at the moment given flare ups in virus. So it's not an enormous part of our business, but when you look at that total region. There is some impact across.
You know what I'll call rest of Asia, you know think about Korea, even Taiwan, Japan, Malaysia, Singapore et cetera. So on the Asia side Theres, some puts and takes there I think in terms of.
Terms of how we think about that business in the Europe business continues to be continues to be quite strong.
And probably probably what's at play here a little bit too.
When we laid out our initial guidance.
In may and talked about the opportunity it could be a little conservative.
That was predominantly in Americas related comment so I think I think we're seeing the Americas business in the U S consumer.
Come back.
Strong.
And that's playing.
So most of our businesses by the way that's a broad based comment across all of our big business isn't really across our portfolio as we see.
The U S consumer coming back strong and certainly that that's important.
From a go forward standpoint, and obviously, it's critical to the vans business I think in particular, given the size of that business in the U S. As.
Well as devices on the brick and mortar business here as well so.
It's obviously really encouraging for us I mean over the last thing I would say, we still we still are maintaining a fairly cautious approach from a year ago perspective on our in our direct to consumer business, we've got sequential improvement.
<unk>.
R R.
Our expectations, we saw a stronger result in Q1 as I said, we've extrapolated on a bit into Q2, but we remain careful there in terms of.
How that will play out over time, so hopefully that answers your question.
It does maybe that's kind of just a clarification question on that is it fair to characterize Europe, as maybe being a quarter.
I'm the U S. In terms of how you're stacking the resurgence in demand is that a fair and accurate kind of depiction.
Well I mean, you know.
Our business has been really good all the way through what I would say, it's a fair characterization in terms of the consumer.
Certainly the fact.
That we opened the quarter in Europe with significant door closures I think over half of our doors were closed in the beginning of the quarter on many of those were closed through a third to half of the quarter.
We are open we are open for business here now obviously as we closed the quarter and as we sit here today. So I think from a consumer standpoint consumer confidence, yes, that's a fair.
Fair characterization, our business, though has been really good and resilient.
All the way through our business actually on a 2 year stack in Europe was up.
Quarter.
Got it thanks for that color helps that.
Thanks, Thanks, Kevin.
Thank you. The next question today is coming from Matthew boss from.
We're gonna your line is now live.
Great. Thanks, so on the North face maybe could you help speak to order trends that youre seeing in the business and just drivers of the 15% to 17% increased outlook this year, which basically doubles your long term target just what youre seeing in the business and confidence in those.
Those targets.
Yeah, maybe I'll, maybe I'll start there Matt good morning.
Yeah.
The order trends are good.
And honestly the <unk>.
Outlook has come up a bit and the north face in the vast majority of that I think is related to the U S Order book.
To be blunt.
So.
The order books are.
Good, but probably what's more encouraging and I'll, let Steve talk about it here is is the sell through.
<unk> to be really strong across our business across geographies and across channels.
So thats, giving us a lot of confidence in the things that we're doing that that's really that's really resonating with the consumers that strong.
<unk> sales through obviously that get stronger order book, So Steven on if there's anything you want to add there.
Yes, I would just say its third phase sits in net in the outdoor Cam, which has had a lot of energy.
Last year and that's carried into this year.
Northeast is at number 1 global brand.
And with the work that the team has been doing that.
The focus around really the segmentation between the on mountain in Hearth Mountain offer.
We see a very strong growth with our future like products.
Really proud of the team and the ability to deliver effective and secure to out.
Outside.
Magazine Awards.
Cross 2 different categories for 1 collection of footwear, just really validates north faces opportunity within that outdoor footwear space.
But also you've heard us talk a lot about getting 365 day relevancy to evolve our sportswear specifically our logo.
Logo wear and to be able to drive triple digit growth in the quarter I'm just validates the work being done.
Demand thats there for this brand.
Globally.
We continue to see very strong results internationally led by Europe and <unk>.
China very strong and it just.
It's great to see the momentum building here built based on the strong sell throughs that Matt referenced the brand is in a really good position for the balance of the year, and hence, giving us confidence to raise crazy outlook.
Great and then maybe just a follow up on the expense line, Matt how best to think about expenses that.
What you see as transitory or more 1 time to this year and is there any change to the flattish 5 year forecast I think you had laid out which I think in the next 2 years would drive pretty material leverage on the SG&A line, just making sure we're thinking about this right.
Yes so.
Yes, there's certainly when.
About SG&A.
Short term.
There are some transitory headwinds I think we talked quite a bit about that in may and that hasnt really changed I think we specifically see that in some of the freight costs. Some of the freight out costs, where we've seen a free.
Pretty significant increase I think a lot of that is around supply.
Are you thinking about man.
As well as in as well as in distribution.
We've got we've got some onetime costs that we're navigating here in the short term as we as we bring on board some new distribution capabilities to new capacity and a couple of places.
The U S as well as our new distribution center in.
Fly in the UK so.
More quickly.
Lap that and move past that and sort of growth.
Both through debt. So certainly I think there's some transitory headwinds as it relates to.
On the longer term view, what we've said is that we expect.
First of all really happy to see our Q1 results right and the leverage that we saw their vs.
In our original expectations now I will say some of that some of that timing related certainly in terms of the spend shift spend timing some of that shifting shifting out a little bit.
But but happy to see that kind of progress. We've said that we expect to exit the year with SG&A leverage and we said we expect to see.
Our.
Next year will be sort of right on track with the long range algorithm.
And sort of the path towards that mid teens overall operating margin.
That we laid out in Beaver Creek will be back on that path and so.
Hopefully that gives you gives you the sort of the context here looking forward.
Great Best of luck.
Thank you. Our next question today is coming from Michael Binetti from Credit Suisse. Your line is that life.
Hey, guys. Thanks, I have a few.
Thanks for all the help today on.
I guess on.
<unk> guys, Matt I can tell you you see some optimism in the order book in North America. It really helps you would talk about that a little bit what's what's.
Jim.
Just help us understand where the increases are coming from in that business and I think I think maybe someone touched on it earlier that there was it looked like a little bit of a wholesale shift that impacted first quarter, but I think it'd be really helpful to understand where the increase their comments on the wholesale order book, particularly in North America relative to where you were.
90 days ago.
Yes.
Good morning, Michael.
I would say, it's really sort of broad based honestly across the U S market.
And it's really driven by.
As we saw on our own stores.
We just see a continued improvement in the business driving I think a lot.
Chennai too.
The fact that consumers are coming back into stores.
We're relatively well positioned from an inventory perspective.
Coming through spring and as we head into back to school.
And so we're seeing those sales to stock ratio has performed quite well.
And again, that's broad based we're seeing that in the in the.
Sort of the specialty channel.
Seeing it with some of our key National partners. So I don't think it's any 1 place I think it's relatively broad based and as you know that the order windows are a little tighter in vans, meaning we're taking orders about 4 to 5 months out based on our shorter lead times, there and so.
So we said we'd have the opportunity to get after more opportunity more volume if the business.
It came on a little stronger and we've seen that occur and so that's sort of playing out.
As we as we hoped it would and it is.
And then I guess you made a comment in the prepared remarks on on vans that you.
He thought we.
You would see some reflection of vans being at the top of the competitive set.
Over the next few quarters, and we haven't seen many of the footwear brands report.
Net here lately and I would argue also 2019 you know you guys are that you guys are having.
Strong gross rates in vans in 2019, you are comparing.
Against that but I'm trying to think.
Maybe you could just tell me a little bit more what was behind the comment that you think you expect to be at the top of the competitive set as we look at vans over the next few quarters.
Good morning, Michael This is Steve I'll take that.
But we see the opportunity to 2.
Perform at a high level here against our competitive set is really within our supply chain ability to service.
The forward demand that we see.
And we really keep vans positioned with inventory, which is having.
Certainly in a positive impact on the ability to see this the wholesale.
Lift, but also the D to C lift.
Debt we're seeing.
You all might remember in the last call I talked about.
Having.
Significant opportunity.
D to C came back on board and that momentum is building.
And carrying us really nicely into the back to.
The school.
<unk> frame here demand trends are encouraging.
And.
Our ability we're set for back to school with the inventory required in that comment about the supply chain really is about our ability to chase back into and replenish.
Net inventory, if we see an outsized sell through.
Through consistent with what we see here today.
It makes them maybe.
I'll add 1 thing there that we've talked about the point about <unk>.
The competitive set part part of that really is also around our retail stores right and.
On the retail store teams in those in those.
These associates really that are the brand ambassador as we've talked about that's been a bit of a challenge for us quite honestly of stores were closed throughout a large part of last year, not having that which is a big part of sort of the overall ecosystem not just the opportunity to buy in stores, but the experience that you get and the connection and the engagement that net oftentimes.
It is most robust in those stores and so we know that stores are open as consumers are back in stores, that's going to play to our advantage and so thats that.
I think part of that thinking in terms of how we feel versus the competitive set.
I'd pile on there a little bit Michael I mean, we're reaping the benefits of supporting our retail.
<unk> teams through last year by.
By not furloughing them.
But we carry those those talented associates forward and.
Historical conversion rates that we see we're actually seeing a slight outperformance to that and that's drive that's another aspect of the strong DTC results that were.
Currently seeing.
Okay. Thanks, a lot for that test.
Thank you. Our next question is coming from Erinn Murphy from Piper Sandler Your line is now live.
Great. Thanks, Good morning, Steve you talked about in your prepared remarks about the wholesale level coming back to almost pre pandemic levels can you share a bit more about.
Complexion of wholesale today versus pre pandemic from a mix perspective, how does it look in terms of the competition between key partners third party digital and then I have a follow up on dickies.
Okay.
Yeah, I'll just I'll just follow the line of your question there.
Aaron I think the key account.
<unk> component of our wholesale business is critically important in some of those key accounts are digital.
Digital key accounts and we've talked a lot about our European partners.
Our Asia partners, but here in the U S. We're seeing strength in the outdoor space, we're seeing strength in the sporting goods space.
About the <unk> and <unk>.
As we as we get our brands in a position to fill that demand.
On the pent up energy that we saw coming out of Q4 into Q1.
As driving that wholesale performance.
Got it great and then on <unk>.
I mean, the growth has been really incredible both on the topline is all on some margin can you share a bit more about where you see the incremental share gains coming from both in the Americas from here as well as in China. Thanks.
Sure.
I'll grab this 1.
And Matt if I Miss anything filling in the blanks here, but you know where we.
We're excited about the dickies business since since the acquisition.
Brand has significantly outperformed our acquisition plan and even despite COVID-19.
We're seeing strength in our core work business here in the United States, We're seeing really nice.
Acceleration in the in the.
Work lifestyle component you know that's now about 40% of our total revenue.
This team over the last 2 years has really simplified their approach to the business.
Focusing on their core icons building out the lifestyle piece of the business, while really respecting that core.
Workwear.
We have channel.
Expansion opportunities that we see going on beyond just that those core work points of sale, we're growing into sporting goods.
The recent launch of the skate collection is accessing a whole host of new specialty scale accounts.
<unk>, which is just great.
Brand building image.
<unk>, it's also giving them permission to to elevate some of the offer we have recently launched the signature collection, which is an elevated higher price point better gross margin.
Collection of items really built off those those.
Core icons.
It's just I think it's I think the point here is the focus of the business.
It's broad based across all 3 regions.
Building against the.
The the traditional channels, but because of this broad based momentum that we're able to now extend into.
Adjacent.
Channels of distribution, new wholesale partners, while we at the same time build our digital acumen and our ability to to speak to consumers directly.
Yes.
Maybe just 1 thing to add there maybe a little less sexy, but also really important.
Give credit to the teams and thanks.
Talking about dickies at low to crazy that the brand is performing and the teams are doing a great job, we didn't make it easy on the net after acquisition.
We had to spend the contour business and we sold off occupational work all of which had had impacts that because of the connections and the back end of some of the things that we were doing there.
So we.
We've had some fits and starts there in the early days, but we really now starting to see the benefits in the supply chain from some of the integration activities around around demand planning as an example, which which ultimately allows us to service the business on a better way to so that's certainly helping while at the same time, obviously there is a lot of momentum from.
From a brand heat perspective, so those things coming together.
I think sort of.
A 1.2 punch.
Thanks, so much.
Thanks, Eric.
Thank you. Our next question is coming from John Kernan Cowen. Your line is now live.
Yes, thanks, a lot thanks.
Thanks for taking my question.
I wanted to go back to vans, you gave some helpful commentary on north space, and where that business is from a margin.
On standpoint, I think you said mid teens for this year, which is an impressive recovery where does vans sit in the overall margin profile relative.
Where it was yeah.
In Beaver Creek, and pre fiscal 'twenty I know it was significantly higher.
From a margin contribution margin than every other brand on the portfolio just curious.
Where that sits now on where you think it's going to go in fiscal 'twenty 2 and beyond.
Yeah.
Yes.
It's still on the same spot.
Well above.
Most of our brand portfolio, you know from a profitability standpoint really strength in the gross margins strength driven from the direct to consumer business that really really profitable brick and mortar franchise.
You think about I mean, the 1 thing I would.
They've told us versus pre COVID-19 levels, there's still a little bit.
Headwind there primarily because of 2 things 1 the freight side of things that they're dealing with as all of our brands are but remember too that the 1 business where brick and mortar is.
Really significant and while we're seeing.
Sequential improvement and while Fortunately, we're seeing that even even be a little stronger than we thought we're still we're still modeling brick and mortar to be down across the year and not really fully recover until early fiscal 'twenty..3 that was my point earlier about we remain fairly conservative in our outlook there.
As you know as we move through in particular.
So over half of the year, so there's a little bit of overhang there in the short term, but yes vans vans profitability.
You would've seen in Beaver Creek, and and what we've talked about historically that remains in the outlook on a on a longer term basis.
You know really compelling in terms of in terms of value creation.
Understood and then just going back to.
I guess north face in outdoor.
Can you talk to the growth youre, giving off of.
Fiscal 'twenty pre COVID-19 levels.
In the case of nice recovery can you talk to the sequencing of.
Back to go through the year.
I think the guidance for the remainder of the year was above where you were in Q1. So just curious how we're thinking about north face as it relates to both wholesale and DTC as we go through the remainder of the year.
Yeah, certainly on and I'm not going to be specific quarter to quarter, but you can expect sequential improvement.
<unk> is as we step through the year.
Notwithstanding what could be some.
On volatility from a shipment timing standpoint around that.
Peak shipping window as we begin to move into.
Fall holiday.
Yeah, I think I think the thing to remember there is the strength.
It's still a heavily.
Weighted business toward.
Fall holiday winter time.
And the strength of our performance last year from a sellout perspective.
And the and the order book profile as a result of that both in the U S and in Europe.
So you know.
That's a big part of the growth is.
As we see that wholesale business bouncing back sharply and as we see our direct to consumer business continued to recover sequentially as we talked about in vans.
Similar kind of kind of comments there.
Understood. Thank you.
Okay.
Thank you. Our next question is coming from Bob <unk> from Guggenheim.
It is now live.
Hi, Good morning, Thanks for taking the question I guess I would love to hear some more about what you've learned so far on Supreme.
The update the integration and the game plan any early learnings I.
I think the accretion was probably a little bit better than we anticipated.
On hydro.
Any commentary you could share with us would be great. Thanks.
Yes, good morning, Bob.
So I would tell you first.
We're really happy with with the progress of our integration.
On the thoughtful really targeted approach that we're taking.
Allowing supreme the.
<unk> need to learn about VF.
Our VF teams the ability to learn about the Supreme business, and where are those opportunities to provide capabilities.
The brand is performing.
In line with our expectations and those expectations were seeing stronger results versus the long.
Long long range growth targets that we have for the business.
I think where we're connecting most most probably most effectively is with our supply chain teams and it couldnt certainly couldnt come at a better time is as we look to leverage our logistics capabilities and leverage our scale and the relationship.
Chips, specifically to assist in shipping.
Work in partnership with the Supreme team to assure that there there are weekly cycle of the drops.
Stay as close as possible to the going in seasonal plant. So it's early.
Certainly.
Certainly in the in our understanding of the business, but we're very confident about the long term value creation thesis that we've put forward for the Supreme business and continue to see.
Regional expansion.
And partnering with.
With the team to leverage our skills and capabilities.
Great Thanks, and just.
On the supply chain I guess, if we go back to that.
<unk> decision to add the incremental air freight.
Is that a function of just trying to make sure you have the product to meet the demand is it incremental bottlenecks that you're seeing in Vietnam or in China.
And I guess is.
The expectation just in the coming quarter or if you can just give us an idea in terms of how long do you expect the incremental.
Pressures on the margin from the incremental air freight.
Yes, I mean.
Lee.
What we're dealing with there.
Yes.
What we said I think the posture. We have taken here is that the business is strong from a demand standpoint, and we're going to ensure that we can satisfy that demand in the most optimal way.
So we're certainly looking where it makes sense, we're going to spend against their freight and other expedited freight avenues to ensure we do that.
We're seeing certainly some delays in the supply chain and I will tell you for us it's generally weeks.
Not not months, but.
But we are seeing some delays in the supply chain.
Given the environment in southeast Asia in particular.
Fortunately by and large most of our factory.
This operational that's not 100%, but most of it is operational.
It's not obviously, we're working really hard to to to understand what those impacts will be and I think again as I said earlier, we anticipate maybe some sub optimization from a flow standpoint at the beginning of the season, but we certainly expect as we move.
<unk> and we're gonna be able to support the business and ultimately deliver deliver things for fall holiday.
Okay, and maybe to pile on here Bob.
I think as we look at strategically using air freight and other.
Ex bedight it forms of moving our goods, we see an opportunity to to capture share.
Move through that because we do think.
In some cases.
Because of our factory partners their current.
Operational.
Capabilities, certainly not operating at full capacity, but at at sufficient capacity, we think we have the opportunity to.
Be in a position.
2 to grab share with some of our large brands certainly with our own distribution on our own D to C and e-commerce, but there's opportunities to work with our key wholesale partners and advantage their position as well.
Steve if I could just follow up on that.
Are you, saying.
You've taken additional orders because you you.
You feel like you can meet the demand or are you still working with your original order books across the various brands.
Trying to understand the dynamic.
So job 1 is to is to really fill the initial order.
Order demand we did see additional.
Demand come in to our fall order books.
That's reflected in our outlook.
And within that there is a.
Additional.
Goods to to service upside demand you know as well, it's not going to be on it.
An exceptional amount.
But we are really playing to win because we see an opportunity here to recapture share and an advantage at least our largest brands.
But really looking across our whole portfolio.
Because of the strength and capability of our of our supply chain teams it's not.
Is it I mean this is a this is a very difficult environment, we're not the only ones to talk about that.
But this is where you.
Our team has really come to life. This.
As Ware VF is built to compete in this kind of environment and we feel very confident about our ability.
And.
Im going to use that we can control to food.
To supply the demand.
And air freight expedited freight as a critical part of our being able to do that.
Okay.
Thank you.
Thank you. Our next question is coming from Jonathan Komp from Robert W. Baird. Your line is now live.
Yeah, great. Thank you just maybe 1 clarification first when thinking about the D to C outlook I know you raised the full year target but.
Are you assuming the trend you're seeing currently for vans does not continue or was that the message and I guess globally for D to C heavy reflected there.
On a more positive order book indications into how Youre thinking about your own D to C business.
Yes, I think from a DTC perspective, what we've done is certainly we sort of think what we saw occur in Q1.
And we've.
Begun to ups.
Uplift are.
The projections and particular in Q2 in particular in the vans business and in particular on vans Americas.
So that's a statement that is true across the majority of the direct to consumer business, we're reflecting some of those trends, but it's most.
Significant isn't that vans business. So we are doing that.
I.
Just to the point, we had in the last in the last question.
What we have done we haven't we've been pretty cautious deal in our actual.
Assumptions from a from a revenue perspective.
In the back half of the year, we haven't really changed those just to just to be Frank.
But what we have done in particular in vans.
I think the point that Steve was making we are leaning in a little bit from an inventory perspective to create some additional capacity there for upside whether that be in our own stores or potentially even in terms of wholesale reorders. So we're beginning to lean in a little more aggressively from an inventory posture standpoint in.
And in particular and to some degree on our dickies business as well.
Okay. That's really helpful. Thank you and Steve if I could follow up 1 more question on vans that'd be curious any learnings you have from the newer approach.
In recent months with the the product drops and the incremental marketing and attention you've been.
Focusing on vans any learnings from that and then how should we think about your.
On your plans in those areas going forward.
And thank you for that question. This is an exciting.
<unk> prevents its something day.
They pivoted and and moved on very quickly.
Remind everybody.
This idea of a 52 week 52 week drop model was to really think and act like a true retail operator and.
Bring a more predictable.
A more visible understanding of the product flow and use this to create brand heat.
Yes.
We've seen that play out extremely well, we're only about 7 weeks in.
They're learning every week.
About how to really manage.
The offer for the week, how to marry the content and the storytelling on.
How to lever broad based.
Global.
Drops that could be available across multiple channels of distribution versus you know very select.
Fault type products, but the point here is there providing visibility and theyre, giving visibility in it.
Time for consumers to 2 to learn about it build the excitement.
And in net frenzy demand.
We've seen it really reflect itself in some of the key some of the key collections that have dropped this year.
<unk> from our specialty.
<unk> collection to the broad based Spongebob Squarepants.
And most recently the Metallica drop.
But.
You're going to see us do or our vans team do is they get.
Refining the model.
They will start to publish the drop list and we think that's something they'll be possible by Q3, so that gives the consumer.
Visibility of what's coming and begin to allow themselves to be positioned.
2 to capture.
On the product if it's a limited drop or be in the queue. If it's a broader base drops.
This is just a really thoughtful.
Evolution to what was already a well.
Well design go to market model.
This is about driving brand heat and increasing.
<unk> consumer demand and ultimately consumer loyalty.
Yeah that sounds very innovative for Brian like vans. Thank you very much that thank you.
Thank you we have reached the end of our question and answer session I'd like to turn the floor back over to management for any further or closing comments.
So just real quick yeah. Thank you everybody for taking the time to join US. This morning, I would just tell you and we couldnt be prouder of our teams who helped to deliver an outstanding quarter.
We continue to work hard to meet the demand and to be able to power back to prevent preterm pre pandemic revenue levels.
Slightly ahead of where we thought we would and to see that earnings recovery.
The validation of our model.
<unk> has broad based on <unk>.
<unk> brands regions and channels.
Despite continued COVID-19 related impacts that we're seeing both from a consumer standpoint, but also back through.
Through our supply chain.
We're going to be range roofing remained very focused on on the things that we can control.
And we're going to drive against those parts of the business, where the consumers coming back strong.
And in.
And continue to drive towards delivering a year that.
<unk> is stronger than what we originally committed to and.
And and meet your expectations, but ultimately drives value for our shareholders that you expect.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day.
Thank you for your participation.
Yes.
Okay.
Yeah.